Valence bankruptcy stirs concerns among shareholders
statesman.com
By Dan Zehr Published: 6:55 p.m. Saturday, July 28, 2012
As the largest shareholder in Valence Technology Inc., California billionaire Carl Berg had the most to lose when the lithium-ion battery-maker filed for bankruptcy protection.
As the Austin company's largest creditor, he might also have the most to gain.
A group of Valence shareholders have accused Berg of a power grab, claiming that the chairman is using the Chapter 11 bankruptcy reorganization process to take even greater control of the company he has propped up for much of its 23-year existence.
With all the company's assets pledged as collateral on loans he provided, Berg and his companies could emerge from the proceedings as Valence's sole owners. And while they readily admit that Valence would have failed long ago had Berg not pumped well more than $100 million into the company over the years, the shareholders question why — after saying he would continue to fund the company as long as it was making progress — he chose to turn off the valve just as Valence appeared poised to finally post a profit.
"They were presenting themselves as just about to break even and just needing some more money," said Michael Stavy, an energy economist and Valence shareholder. "Since Carl Berg was funding it all these years, why change now?"
Few people outside the company's boardroom know the answer to that question. Berg did not respond to messages left with a colleague at his offices in California, and Valence officials declined to comment, citing the ongoing bankruptcy proceedings.
But some of the company's shareholders say Berg cut off funding and steered Valence toward bankruptcy so he could consolidate ownership of the company. Some of those investors have retained Dallas attorney Hamilton Lindley and are planning to file a securities lawsuit against the company.
Lindley said he is investigating potential claims and hopes to file a formal complaint before the company's Chapter 11 reorganization concludes.
"Many individual shareholders expected Berg would come in unless the company had serious financial issues," he said. "They were personally assured that would happen, and of course it didn't in this case."
Berg's decision
Without Berg's funding, Valence was a bankruptcy waiting to happen. Although investors and lenders pumped more than $600 million into the company since its launch in 1989, it has yet to produce a dime of profit.
Berg, who amassed a fortune in Silicon Valley real estate before turning to venture capital investments, had regularly stepped in at crucial times to fund the company's operations and keep it afloat. And on multiple occasions, he and company executives said those critical capital infusions would continue as long as Valence showed progress.
However, with the company facing a $3 million payment by July 31 — the final payment on a $20 million debt issuance from 2005 — Berg didn't provide any new funding.
"A $3 million debt didn't seem like an insurmountable amount given Berg's past investments," Lindley said.
Valence executives and board members sought at least one alternative source of capital. However, they rejected the terms offered by Silicon Valley Bank — Berg declined to subordinate his loans to the bank's — and the board voted to file for bankruptcy protection.
Berg abstained from the vote.
The decision to file for bankruptcy protection came after a contentious boardroom debate that resulted in the resignation of two directors.
One of them, Bert Roberts, accused fellow board member Donn Tognazzini of violating his fiduciary duty by holding up the bankruptcy for several weeks. Documents filed with the Securities and Exchange Commission make clear that Roberts resigned because of what he called Tognazzini's "obstructionist" approach to the deliberations.
Tognazzini, on the other hand, resigned several days later, after the board voted to file for bankruptcy protection. In a letter he wrote to the board before the final vote, he had argued that Valence's executives and directors had not fully researched or exhausted other possible remedies.
"If this company could raise considerable funds when it was a mere idea," he wrote, "the right effort can certainly result in funds being raised in its present condition."
Never in better shape
Since its release, Tognazzini's letter has become a manifesto for many minority shareholders. Stavy and other investors regularly pointed to it as evidence that Valence had funding options other than bankruptcy.
One possible avenue was an agreement Valence held with Wm. Smith & Co., a Denver-based research and investment firm. Under the terms of the agreement, Valence could have sold up to 5.4 million shares. Whether the company could have found a buyer for that stock — and whether it could've sold at a price that would have raised enough to cover the $3 million loan payment — is debatable.
Regardless of the viability of other funding sources, the timing of Berg's and the company's bankruptcy drew criticism from some of Valence's shareholders.
The lithium-ion battery industry has a long history of false starts, promising innovations and unfulfilled potential. Yet, shareholders argue, Valence was within one or two new customers of finally breaking even after more than two decades of research and development on battery technologies that develop at a notoriously slow pace.
Over that time, the company had established a reliable manufacturing process. It had established solid agreements with several customers, including U.K.-based Wright Bus and Segway. Its revenue had more than doubled over the past five years. And it had finally resolved a patent dispute that had been hanging over the company for almost eight years.
In addition to all of that falling into place, the minority shareholders argued, the market for electric vehicles and backup battery systems was starting to turn in Valence's favor.
"Technologically, they've never been in better shape," said an investor who asked to remain anonymous because of his job at a financial services firm. The company's assets "would be worth a lot more in a partnership or sale, so why not at least explore those options?"
Wait and see
Given another extension on its $3 million debt payment and an additional $3 million in working capital, Valence could have continued its normal operations through at least mid October, Tognazzini said in his letter to the board. That could have given the company enough time to produce, deliver and collect on a $20 million backlog of orders, he wrote.
Given the debt payment and the company's need for more funding, though, the majority of directors decided a reorganization was necessary. The company filed the voluntary, debtor-in-possession bankruptcy petition on July 12. The first meeting of creditors is scheduled for Aug. 7.
Those proceedings could start to answer some of the unanswered questions, including the one so many minority shareholders are asking: Why did Berg stop funding the company now?
Berg's other business ventures provide some hints, but only hints. Now in his mid-70s, Berg is reportedly in final negotiations for the sale of Mission West Properties, the real estate investment trust he founded in 1969 and that produced his billion-dollar fortune.
Analysts have estimated the company's portfolio, which includes some of Silicon Valley's prime properties, at roughly $1.4 billion, according to a July 20 report in The Wall Street Journal.
What's much more clear, though, is the considerable influence Berg can wield over Valence's bankruptcy proceeding. He holds two loans worth $69.1 million in principal and unpaid interest, and all of Valence's assets are pledged as collateral for those debts. In addition to being the primary secured creditor — the first in line in a bankruptcy proceeding — Berg and his companies hold more than 44 percent of the company's outstanding shares.
Generally speaking, Berg's secured credit gives him first dibs on the reorganized company, and unsecured creditors, such as suppliers and the outstanding $3 million loan holder, Carl Warden, come next.
As for the minority shareholders, said Neil Sobol, a professor at Texas Wesleyan School of Law, they typically have little control over the final resolution of a Chapter 11 reorganization. Barring a reinvestment in the company's reorganization plan, their investments will get back pennies on the dollar, if that.
"If they're just waiting to see what happens," Sobol said. "They're last in line."
Contact Dan Zehr at 445-3797
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